Lessons from history: why the push for savings for all is wide of the mark

Author

Professor of Accounting and Financial Management, University of Sheffield

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Josephine Maltby does not work for, consult, own shares in or receive funding from any company or organization that would benefit from this article, and has disclosed no relevant affiliations beyond the academic appointment above.

As predicted the US Federal Reserve has raised interest rates after nearly a decade, which means a slightly better rate of return for savers. Meanwhile in the UK, the Bank of England has kept the benchmark rate at a rock-bottom 0.5% for the 81st month in a row. All the while there are calls from policymakers and politicians for a grand vision for saving. People should take responsibility, the argument goes, for their own welfare.

And the state needs them to believe it. Otherwise, it’s claimed, a combination of factors – longer life expectancy and financial illiteracy – will create an impossible burden.

UK pensions are currently undergoing an apparently endless set of reviews and alterations. The steady rise in the age of qualification for state pension, the chance to use pension savings as a bank account, and the introduction of auto-enrolment at all workplaces by 2018 are all aimed at increasing savings for retirement.

And there may be more to come. Both Iain Duncan Smith, the work and pensions minister, and the prime minister David Cameron, called for a rethink of social security – potentially a move to a system where people would “save from day one”, along the lines of Singapore’s Central Provident Fund. This would involve making mandatory deposits into a fund to be used as needed, in times of sickness or unemployment.

Iain Duncan Smith wants us to be better savers.EPA/Facundo Arrizabalaga

The calls for saving, with strong government support, are not new. They go back to the birth of the savings bank movement at the beginning of the 19th century. In the period after the French Revolution the British elite was worried about economic crisis, unemployment and labour unrest. Organisations like friendly societies and early trades unions brought working men and women together to defend their interests. Savings banks run by local elites (the vicar, the squire, the factory owner) were conceived as a solution to social and political anxiety. Promoting savings to the lower classes was aimed at cutting the “enormous” cost of the poor rates charged by parishes.

The movement took off with support from the two main parties, the Liberals and Conservatives, and from the churches. By 1861 there were 645 banks in cities, towns and villages nationwide. Savings were good for everyone, they claimed. The banks would foster the virtue of thrift, discouraging the poor from drinking and idleness.

Saving would also, literally, give them a stake in society, or as Scottish minister and theologian Thomas Chalmers said at the time: “An interest in the social order, in the peace and stability of the commonwealth.” A man with a bank balance was much less likely to call for the overthrow of the system. William Gladstone and Benjamin Disraeli, Liberal and Conservative party leaders, both suggested that a man with £50 or more in the bank deserved to be given the vote.

Criticisms of the savings movement

The banks’ drawbacks, though, attracted less attention. Their interest rate, tied to the return on government bonds, was not generous.

With amateurs on their boards, the banks were vulnerable to managerial fraud, and there were some sensational collapses – those of the Dublin and Cardiff banks were the highest in profile. Savers had no guarantee of repayment, and might lose every penny. Some people avoided the local savings bank because they did not want their bosses to know how much they had saved, in case the information was used against them when they asked for a pay rise. And there were continuing accusations that the banks were mainly used by the middle classes, because they were the ones with the spare cash. Being poor meant having no margin for savings.

By the end of the 19th century, the number of savings banks, especially of the small village banks run by the gentry, was falling. New organisations run by and for their members – the building societies, the Co-operative movement and the trades unions – were getting bigger and stronger.

And there were now challenges across the Liberal and Socialist parties to the claim that the poor should be monitored and disciplined to make them behave better and consume less.

Writing in 1909, the Fabian Emily Townshend mocked the view that “for any man to enjoy any benefits which he has not definitely worked for and earned is injurious to his character”. She pointed out that she had done nothing to earn the annual dividend she got on her railway shares, or the “miraculous” news that “certain shares that were worth £4 yesterday are now worth £5”. Why should the poor be subjected to a harsher discipline than she was?

There are inescapable parallels with the birth of the savings movements in the 19th century with the political calls for savings today- for instance calls to be thrifty and help control public spending, while financial institutions with amateur non-executive directors ignore mismanagement until it’s too late. And today there are groups for whom saving is not an option. Recent research suggested that savings are difficult or impossible for a substantial number of working people and many do not qualify for auto-enrolment.

It goes to show that ideas around thrift might sound good and appeal to key parts of the voting electorate. But it begs the question: how will the excluded respond when they keep being urged to pay for a stake in society?